In a review of German energy policies, the International Energy Agency commended the country for its long-term commitment to developing a low-carbon energy system – in particular its comprehensive energy strategy, ambitious renewable energy targets and plans to reduce energy consumption.

The report noted that Germany has successfully implemented a broad suite of robust energy policies across all sectors notably in energy efficiency and climate change.

Yet the scale of Germany’s energy policy ambitions, coupled with the size and energy intensity of its economy, and its location at the heart of Europe’s energy system, mean that further policy measures are necessary if the country’s ambitious energy transformation, or Energiewende, is to maintain a balance between sustainability, affordability and competitiveness.

To date, German consumers have absorbed the costs of the Energiewende, but the debate over the social and economic impacts of the Renewable Energy Sources Act (EEG) has become more prominent as the share of renewable energy has continued to grow alongside rising electricity prices. The transition to a low-carbon energy sector requires public acceptance, and, therefore, retail electricity prices to remain at an affordable level, said IEA.

“The fact that German electricity prices are among the highest in Europe, despite relatively low wholesale prices, must serve as a warning signal,” said IEA Executive Director Maria van der Hoeven as she presented the report, Energy Policies of IEA Countries – Germany 2013 Review.

At the same time, the IEA said that energy policy is based on long-term investment decisions, and the framework conditions in Germany for a policy consensus in favour of large-scale deployment of renewables have never been better and the agency urged Germany not to make any sudden changes or retroactive cuts.

“The German government should maintain its policy course based on a predictable and stable regulatory framework while actively seeking means to reduce the costs,” said Maria van der Hoeven. “Sudden changes can undermine investor confidence and will drive up costs in the long term: Any form of retroactive tariff cuts – even if applied for only a short period – must be avoided.”

Furthermore, there is a need to develop a mechanism to ensure that costs can be distributed more equitably, said the agency, as what has worked in the past may not be a blueprint for the future.

Among the key recommendations, the report calls for:

• The development of suitable mechanisms to manage the cost of incremental renewable energy capacity via cost-effective market-based approaches, which will bring new renewable capacity closer to market needs, support investments in appropriate locations and complement planned network expansion;
• Measures to ensure that the costs of the Energiewende are minimised and allocated fairly and equitably across customer groups, including households and small businesses, producers of renewable energy and energy-intensive industry and limit the growth of the Renewable Energy Sources Act surcharge attributable to the deployment of additional renewable energy capacities, while drawing all benefits from the rapid decrease in technology costs that has occurred;
• Timely and cost-efficient investment in transmission and distribution networks and a regulatory system that provides sufficient financial incentives and investment security for mobilising the necessary investments in distribution;
• An assessment, in co-ordination with all relevant stakeholders, of the extent to which the present electricity market arrangements enable the financing of economically viable investments in new, flexible gas-fired generation and cost-effective electricity storage. Part of this assessment must examine the suitability of capacity markets as a transitional measure to support the adjustment to a post-nuclear power system.

Germany must also develop structural co-operation at regional level, and within existing European mechanisms, in order to enhance security of supply at reasonable cost, especially under extreme weather conditions or periods of prolonged high demand, said IEA.

Decisions on German energy policy inevitably have an impact far beyond the country’s borders and should be considered within the context of a broader European energy policy framework and in close consultations with its neighbours.